Developmental Impact of Angola-Sino Relations

Angola-Sino relations have expanded from the 1960’s and 1970’s not just for Angola but for the entire African continent. Stronger relations began after the end of the civil war in 2002. China emerges in Angola in the form of foreign direct investments (FDI), infrastructure and development programmes mainly in the petroleum, mining and agricultural sectors, and has firmly established itself as Angola’s leading commercial partner. However, the partnership has to be evaluated to determine if both countries mutually benefit.

Historically, China and Angola cooperated not only on a trade and economic basis but also on a military and political independence basis. Stronger relations began after the end of the civil war in 2002 with increased FDI inflows and the presence of a Chinese embassy in Angola.

The Angolan oil sector is central to its relations with China and key to attracting FDI inflows which have decreased from an average USD 14.7 billion from 2010 to 2015, to USD 14.4 billion in 2016[1]. The number of loan-for-oil deals have increased resulting in trade dependency on China to satisfy oil obligations rather than diversifying trade relations. For instance, almost half of Angola’s total exports go to China, which is a sign of sever export dependency[2].

Crude petroleum contributes 17.5% of national GDP (USD 21.7 million) and accounts for 97.4 % (USD 26.5 million) of total exports of which 46.4 % (USD 12.6 million) is received from China[3]. Angola has positioned itself as one of the largest oil suppliers to China alongside Russia and Saudi Arabia. Oil trade between these countries puts Angola in a catch 22 situation because the basis of attracting FDI inflows is to diversify the oil dependent economy. However, China mainly provides FDI in exchange for oil reserves for developing national oil corporations i.e. Sinochem Group and Unipec. Therefore, in the case of Angola the terms and conditions of trading i.e. resource backed loans; oil collateral service debt defeats the purpose of diversifying the economy away from oil because the end payment is usually in oil[4].

Source: UNCTAD 2018, UNCTADStat Database.

China has more to gain from its partnership with Angola. Firstly, China has been able to secure oil at the low 2014 prices through its “loans-for-oil” deals. Secondly, China is able to increase its exports by contracting Chinese suppliers in cases of infrastructure projects financed by China. Thus, although Angola has benefitted through cheaper financing at a time when commercial banks would have avoided lending to its government, the value returns to China with little skills transferred.

Furthermore, Angola’s debt repayment to China has increased due to a fall in oil prices and the number of “loan-for-oil” deals approximately to USD 25 Billion. Debt has risen to close to total export revenue meaning oil revenues are spent servicing the debt rather than developing the country’s infrastructure, healthcare and industry[5].

China has provided infrastructure financing for the construction of the Caculo Cabaca dam in 2017. It is the largest hydropower plant in the country and will have the capacity to distribute electricity to the entire country and export to neighbouring countries by 2025. This massive infrastructure development project received funding of USD 4.5 Billion by the Industrial and Commercial Bank of China. This benefits Angola because multilateral development institutions rarely back energy projects but China fills this gap. Apart from securing funding, the project is constructed by China Gezouba Co. Ltd and contractually stipulates that the Chinese company will be responsible for the four-year operation and maintenance of the hydropower plant, and training personnel for the technical and operation management of the plant[6].

Angola has a lower bargaining position because most of the value is retained with China. It will have to repay the long-term debt plus interest. A local company able to fulfil the capabilities is not constructing the project or at least supplying certain goods and service. There will be little skills transfer because operating a hydropower plant does not require a large labour force that can absorb the largely unemployed population particularly the youth, and also skills obtained are specialised only to this project and rarely applicable to other sectors of the job market i.e. operating kinetic energy,

Angola is the largest recipient of Chinese FDI in Africa and has been used as a vehicle to drive economic growth from the post-independence stage. The impact directly reflected on the country’s annual GDP growth rate which was at an average of 11.5% between 2002-2008 and significantly dropped to an average of 3.3% between 2009-2016. This was attributed to a decline in international oil prices, economic crisis in 2008 and rising debt to China due to declining oil reserves and trade dependency[7].

Sino-Angolan relations have shown progressive deals on the part of Angola particularly for the construction of infrastructure projects and re-integrating Angola into the world economy after a prolonged civil war. However, these relations tend to over step Angola’s economic diversification strategy away from crude petroleum which is its main export to the rest of the world and more than half to China. Angola needs to reduce trade dependency on China and rather capitalise on the Africa Continental Free Trade Agreement by sourcing out regional trading partners. This will not only reduce its trade dependency but also its rising debt to China.